Limit Order | Definition | Strategy

limit order

Other Types Of Orders

Market Order

Stop Loss Order

Market Vs Limit

When To Use A Limit Order

Limit Order : Definition

SEC Definition : A limit order is an order to buy or sell a stock at a specific price or better.
Breakout Theory definition :  A type of order placed with your online broker that “limits” the price you are willing to by buy or sell at. The limit order is entered with your broker with a specific price to buy or sell. A limit order guarantees price, but not guarantee execution.

A Limit Orders takes a little bit of effort to understand. Below are some concepts that will help you get started using limit orders in your stock trading strategy.

Two Types Of Limit Orders

Buy Limit Order: You specify the price you are willing to buy the stock. Your goal is to buy stock at the cheapest possible price. This ensures that you are not paying more than you are willing. So if Microsoft stock is trading between $24.23 and $25.99. You might want to set a limit order for the lowest price possible, in this case $24.23, be cause this is your limit as to how much you are willing to pay. When the price comes down to, or below your limit price only then will your order be executed. Learn More

Sell Limit Order: You specify the price you are willing to sell the stock. Your goal is to sell at the highest price possible.  For example, If Apple stock was trading between $520 and $580, you would want to sell at the highest price. You would enter a limit order with your broker to sell your shares of Apple  at $580. If the market price or last price reaches $580, only then will your limit order be executed. Learn More

Stop Limit Order: This combines a limit order and the “automatic” nature of a stop loss order. You set a price that you are willing to sell with your broker. Anytime time while you are away, and the market hits your price, the stop turns into a limit order. There are some advantages and disadvantages in using this stock trading tool. Never the less, it is one of many tools to make you a powerful trader. Learn More

Time is A Factor When Using A Limit Order

Remember that the market price may or may not reach your limit order price. It depends if the market is currently trading very close to your limit order price. While logic dictates that you could set the lowest price imaginable, the question lies if the market will realistically trade to that level. So, when using limit orders, traders look to shorter a time frame stock charts or  like the intraday charts.  Learn More

How To Use A Limit Order

If you received a signal to buy a breakout, and wanted to buy some stock in Google today. It’s important that we look at today’s trading range.  You might find looking at an intraday stock chart  that Google’s trading range was as low as $577 and a high $587.  Because $577 is the lowest price, you will place an order with your broker to “Buy Limit $577. As soon as the market price comes down to $577 your order to buy will be executed and you will have bought the stock at the best possible price today. If you already own Google stock and wanted to sell today, you want the best possible price of $587. You would place a “sell limit order at $587. When the market price or “last” price quoted goes up to $587, only then will your order to sell be executed.

Real World Case Using A Limit Order

The above example is very hypothetical and does not represent real world dynamics. It is intended to give you an understanding the mechanics of a limit order. Many factors, including volatility of markets, stock’s liquidity, bid ask spread, trading volume, slippage, data feed delays, etc alter the situation. Resulting in your order not getting executed.

In the real world, if you wanted to buy Google stock using the trading range above you would place limit order with your online broker to “buy limit at $587 which is 3 point above the lowest price of the day. Likewise when selling Google stock, you would most likely place a “sell limit order at $584”  which is  3 points below the high of the day. You have to give the market a little room if you want to order to get executed within a reasonable amount of time. Other Factors Using A Limit Order

 

 Related Articles

When To Use A Limit Order Recognize when to
 use a limit order. Some market conditions volatile.
 Get the best pricing.
Market Order Vs Limit Order Deciding what type
 of order to use. Situations vary.
 Examples.

Previous post:

Next post: